Trade Setup using Fibonacci Convergence or Confluence. |
Convergence is when 2 or more Fibonacci price relationships coincide in a relatively tight range. You may use the Fibonacci convergence to find very strong resistance or support. This is very helpful in planning the size of your position, the stop loss, and the whole action plan.
Implementation on chart
Take the Fibonacci retracements and projections from a number of different lows or highs to find a level where 2 or more retracements/projections are at the same level. This will give a level with a strong possibility of a turning point.
We have taken an example of DEEPAKFERT.
Using the daily chart, we can see the scrip followed a good bullish move till November 2017, After November 17, the scrip showed dips month on month with slight retracements in the month of January 2018. We have seen this scrip showing a good upside momentum again in the month of April 2018.
Now consider that we want to initiate a trade on this scrip, which can be Intraday/Short term. Our next point is what will be the nearby resistance and support. In such a scenario, we are using Fibonacci Convergence tool:
Notice our current CMP of the scrip is 373. Now, since the scrip is trading above 61.8% of Fibo 2, we need to find the next resistances. From the chart, we can clearly see the next resistance will be either 50% of Fibo 1 at the levels of 386 or 50% of Fibo 2 at 392; support will be 61.8% of Fibo 2 at the levels of 366. So our trade set up should be:
Using the daily chart, we can see the scrip followed a good bullish move till November 2017, After November 17, the scrip showed dips month on month with slight retracements in the month of January 2018. We have seen this scrip showing a good upside momentum again in the month of April 2018.
Now consider that we want to initiate a trade on this scrip, which can be Intraday/Short term. Our next point is what will be the nearby resistance and support. In such a scenario, we are using Fibonacci Convergence tool:
- Step 1: Draw a Fibonacci from recent swing low to swing high (Indicated by Blue Fibo on charts).
- Step 2: Draw a Fibonacci from recent swing high to swing low (Indicated by Red Fibo on charts).
- Step 3: Try to figure out where these two Fibo coincides and note down the levels.
Notice our current CMP of the scrip is 373. Now, since the scrip is trading above 61.8% of Fibo 2, we need to find the next resistances. From the chart, we can clearly see the next resistance will be either 50% of Fibo 1 at the levels of 386 or 50% of Fibo 2 at 392; support will be 61.8% of Fibo 2 at the levels of 366. So our trade set up should be:
BUY DEEPAKFERT @ 373 | Target: 386-392 | SL: 366 (Profit of 13-19 points with a risk of 7 points)
So, this trade setup Risk/Reward will be 0.40-0.45%. If the level of 392 is breached, we can see the scrip at the levels of 413.
So, this is how Fibo convergence tool helps in decision making.
